BREAD FINANCIAL HOLDINGS, INC. quarterly report, Q1 FY2015

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Business context and reporting period

Alliance Data Systems Corporation (the filing registrant; the supplied metadata identifies Bread Financial Holdings, Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. Its reportable businesses were LoyaltyOne, Epsilon, and Card Services. Results include Conversant, acquired in December 2014; BrandLoyalty was consolidated at a 70% ownership interest from January 1, 2015.

Financial and operating results

Unless stated otherwise, amounts are in U.S. dollars and millions. Income-statement and cash-flow figures are for the three months ended March 31.

  • Revenue: $1,601.2, up 30% year over year. Finance charges, net rose 27% to $679.5; marketing services rose 43% to $471.2; redemption revenue rose 26% to $308.1.
  • Profit: Operating income was $324.5, up 15%; net income was $164.8, up 21%; income attributable to common stockholders was $162.6. Operating margin was approximately 20.3%, down from 22.9%; net margin was approximately 10.3%, down from 11.0%.
  • Per-share results: Basic EPS was $2.34 versus $2.59; diluted EPS was $2.32 versus $2.08. The filing’s EPS reconciliation includes a $15.2 million accretion of redeemable non-controlling interest in 2015.
  • Adjusted EBITDA, net: $430.3, up 29% (non-GAAP). By segment: LoyaltyOne $69.6, Epsilon $103.6, Card Services $281.8, and Corporate/Other loss $24.7.
  • Cash flow: Operating cash flow was $174.7 versus $333.1; investing activities provided $337.3 versus using $0.4; financing activities used $811.7 versus $592.4. Cash and cash equivalents ended the quarter at $760.4, down from $1,077.2 at year-end.
  • Credit and asset quality: Average credit card and loan receivables increased 33% to $10,677.3; credit sales increased 37% to $4,959.8. Provision for loan losses rose 91% to $134.9. Net charge-offs were $119.9, with a 4.5% rate versus 4.8%; delinquent principal was 3.9% of receivables versus 4.0% at year-end.
  • Debt and liquidity: Long-term and other debt was $4,865.4, non-recourse securitization borrowings $4,796.9, and deposits $4,510.4. The revolver had $596.0 of availability; the company reported a 2.7-to-1 leverage ratio against a 3.5-to-1 covenant maximum and compliance with debt covenants. Management said available liquidity should meet needs for at least 12 months. Bank subsidiaries were described as well capitalized.
  • Equity and balance sheet: Total assets were $19,052.5 versus $20,264.0 at year-end; stockholders’ equity was $1,911.4 versus $2,396.4. The company repurchased approximately 2.0 million shares for $564.9 during the quarter.

Material changes versus the prior comparable period

  • Conversant contributed $136.7 of revenue and $45.9 of adjusted EBITDA, net to Epsilon. Its acquisition also increased amortization of purchased intangibles and debt-related costs; Conversant recorded a $9.1 pre-tax loss for the quarter.
  • Card Services growth reflected higher receivables, credit sales, client signings, and portfolio acquisitions. Higher receivables and stable rather than improving principal loss rates contributed to the increase in loan-loss provision.
  • LoyaltyOne revenue and adjusted EBITDA, net grew despite foreign-exchange headwinds. The weaker Canadian dollar and Euro reduced segment revenue by approximately $63.5 and adjusted EBITDA, net by approximately $10.2, as reported in management’s discussion.
  • Basic EPS declined despite higher net income, while diluted EPS increased. The share-count and redeemable-interest effects should be considered when comparing per-share performance.

Outlook, commentary, risks, and unusual items

  • No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expected active short-term LoyaltyOne programs in the second quarter to be slightly below the prior-year period, reflecting campaign timing.
  • Management attributed operating-cash-flow decline partly to the BrandLoyalty contingent-liability settlement and working-capital changes. The company paid approximately $305.5 to settle that liability and $87.4 to acquire an additional 10% of BrandLoyalty.
  • The board increased the 2015 share-repurchase authorization from $600 million to $1.0 billion on April 15, after quarter-end.
  • Funding risk remains relevant: some securitization conduit commitments are short-term and subject to renewal. The filing says there is no guarantee they will renew on similar terms or at all. The company also disclosed subsequent-quarter securitization issuance and conduit renewals/extensions.
  • The FDIC notified Comenity Bank and Comenity Capital Bank that it planned to pursue an enforcement action concerning practices for certain credit-card add-on products. Possible outcomes include penalties, restitution, and business-practice changes; the company could not estimate a loss.
  • Foreign-exchange movements materially affected reported results and other comprehensive income. Foreign-currency translation contributed a $62.6 loss in other comprehensive income in the quarter.
  • Management concluded disclosure controls were effective. Conversant, representing $2.8 billion of assets at quarter-end, was excluded from the quarter-end internal-control-over-financial-reporting evaluation due to acquisition timing.

Important facts for investors to verify

  1. Confirm the registrant identity: the filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
  2. Review the quality and sustainability of growth, separating Conversant’s acquired contribution from organic Epsilon performance and assessing the impact of foreign exchange.
  3. Track credit-loss trends, including the rising provision, charge-offs, receivables growth, delinquency measures, and the effect of acquired or newly onboarded portfolios.
  4. Assess refinancing and renewal exposure for securitization facilities, alongside debt levels, covenant headroom, and the substantial repurchases and BrandLoyalty cash outlays.
  5. Monitor the FDIC matter and any resulting penalties, restitution, or required changes to add-on-product practices.
  6. Distinguish GAAP earnings and cash flow from adjusted EBITDA, net, and account for the EPS effects of share repurchases and redeemable non-controlling-interest accretion.